Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**Form 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

** **

**o****        ****TRANSITIONREPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from             to            **

** **

**Commission file number 001-16265**

 

----

 

**LIME ENERGY CO.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**  (State or other jurisdiction of incorporation or organization) | ** ** | **36-4197337**

(I.R.S. Employer Identification No.) |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|

 

**1280 Landmeier Road, Elk Grove Village, Illinois60007-2410**(Address of principal executive offices, including zip code)

 

**(847) 437-1666**(Registrant’s telephone number, including area code)

 

----

 

 

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.  (Check one):

 

| Large Accelerated  Filer o |   | Accelerated Filer o          |
|---------------------------------|--------|-----------------------------------|
|                            |   |                              |
| Non-Accelerated  Filer o   |   | Smaller reporting  company x |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

23,640,500shares of the registrant’s common stock, $.0001 par value per share, wereoutstanding as of August 9, 2010.

 

 

 

----

Table of Contents

 

**LIME ENERGY CO.**

**FORM 10-Q**

For The Quarter Ended June 30, 2010

 

INDEX

 
| ** **    | ** **                                                                                                                                                       | ** ** | **Page**   |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **    | ** **                                                                                                                                                       | ** ** | **Number** |
|          |                                                                                                                                                             |       |       |
| Part I   | Financial Information                                                                                                                                            |       |       |
|          |                                                                                                                                                             |       |       |
| ITEM  1.      | Financial Statements:                                                                                                                                            |       |       |
|          |                                                                                                                                                             |       |       |
|          | Condensed  Consolidated Balance Sheets June 30, 2010 (unaudited) and  December 31, 2009                                                                |       | 1          |
|          |                                                                                                                                                             |       |       |
|          | Unaudited  Condensed Consolidated Statements of Operations Three months Ended  June 30, 2010 and 2009 and the Six Months Ended June 30, 2010 and  2009 |       | 3          |
|          |                                                                                                                                                             |       |       |
|          | Unaudited  Condensed Consolidated Statement of Stockholders’ Equity Six Months Ended  June 30, 2010                                                    |       | 4          |
|          |                                                                                                                                                             |       |       |
|          | Unaudited  Condensed Consolidated Statements of Cash Flows Six Months Ended  June 30, 2010 and 2009                                                         |       | 5          |
|          |                                                                                                                                                             |       |       |
|          | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                   |       | 7          |
|          |                                                                                                                                                             |       |       |
| ITEM 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                      |       | 16         |
|          |                                                                                                                                                             |       |       |
| ITEM 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                      |       | 28         |
|          |                                                                                                                                                             |       |       |
| ITEM 4.       | Controls and  Procedures                                                                                                                                         |       | 28         |
|          |                                                                                                                                                             |       |       |
| Part II. | Other Information                                                                                                                                                |       |       |
|          |                                                                                                                                                             |       |       |
| ITEM 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                     |       | 29         |
|          |                                                                                                                                                             |       |       |
| ITEM  6.      | Exhibits                                                                                                                                                         |       | 29         |
|          |                                                                                                                                                             |       |       |
|          | Signatures                                                                                                                                                       |       | 30         |

 

i

----

Table of Contents

 

PART I - FINANCIALINFORMATION

 

ITEM1. Financial Statements

 

**Lime Energy Co.**

**Condensed Consolidated Balance Sheet**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **June 30,** | ** ** | ** **            | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2010**          | ** ** | **December 31,** | ** ** |
| ** **                                                                   | ** ** | **(unaudited)**   | ** ** | **2009****(1)**       | ** ** |
|                                                                         |       |              |       |                  |       |
| **Assets**                                                                   |       |              |       |                  |       |
|                                                                         |       |              |       |                  |       |
| **Current assets**                                                           |       |              |       |                  |       |
| Cash and cash equivalents                                                    | ** ** | **$**             | **15,676** | ** **            | **$**      | **22,870** | ** ** |
| Restricted cash                                                              | ** ** | **3,801**         | ** ** | **500**               | ** ** |
| Accounts receivable, net                                                     | ** ** | **17,749**        | ** ** | **19,330**            | ** ** |
| Inventories                                                                  | ** ** | **323**           | ** ** | **230**               | ** ** |
| Costs and estimated earnings in excess of billings  on uncompleted contracts | ** ** | **5,417**         | ** ** | **5,532**             | ** ** |
| Prepaid expenses and other                                                   | ** ** | **1,073**         | ** ** | **752**               | ** ** |
| **Total Current Assets**                                                     | ** ** | **44,039**        | ** ** | **49,214**            | ** ** |
| ** **                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Net Property and Equipment**                                               | ** ** | **1,893**         | ** ** | **1,917**             | ** ** |
| ** **                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Long Term Receivables**                                                    | ** ** | **492**           | ** ** | **545**               | ** ** |
| **Intangibles, net**                                                         | ** ** | **3,057**         | ** ** | **3,382**             | ** ** |
| **Goodwill**                                                                 | ** ** | **18,627**        | ** ** | **18,627**            | ** ** |
| ** **                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                         | ** ** | **$**             | **68,108** | ** **            | **$**      | **73,685** | ** ** |

 

1

----

Table of Contents

 

**Lime Energy Co.**

**Condensed Consolidated Balance Sheet**

**(Unaudited)**

 
| ** **                                                                                                                                                                         | ** ** | **June 30,** | ** ** | ** **            | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **2010**          | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                         | ** ** | **(unaudited)**   | ** ** | **2009****(1)**       | ** ** |
|                                                                                                                                                                               |       |              |       |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                     |       |              |       |                  |       |
|                                                                                                                                                                               |       |              |       |                  |       |
| **Current liabilities**                                                                                                                                                            |       |              |       |                  |       |
| Current maturities of long-term debt                                                                                                                                               | ** ** | **$**             | **114**    | ** **            | **$**      | **187** | ** ** |
| Accounts payable                                                                                                                                                                   | ** ** | **7,865**         | ** ** | **8,424**             | ** ** |
| Accrued expenses                                                                                                                                                                   | ** ** | **5,184**         | ** ** | **4,892**             | ** ** |
| Billings in excess of costs and estimated earnings  on uncompleted contracts                                                                                                       | ** ** | **1,407**         | ** ** | **634**               | ** ** |
| Customer deposits                                                                                                                                                                  | ** ** | **766**           | ** ** | **799**               | ** ** |
| **Total Current Liabilities**                                                                                                                                                      | ** ** | **15,336**        | ** ** | **14,936**            | ** ** |
| ** **                                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Long-Term Debt,** less current  maturities                                                                                                                                       | ** ** | **476**           | ** ** | **544**               | ** ** |
| ** **                                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Total Liabilities**                                                                                                                                                              | ** ** | **15,812**        | ** ** | **15,480**            | ** ** |
| ** **                                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Stockholders’ Equity**                                                                                                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Common stock, $0.0001 par value; 50,000,000 shares  authorized 23,640,440 and 23,510,622 issued and outstanding as of  June 30, 2010 and December 31, 2009, respectively | ** ** | **2**             | ** ** | **2**                 | ** ** |
| Additional paid-in capital                                                                                                                                                         | ** ** | **182,480**       | ** ** | **181,665**           | ** ** |
| Accumulated deficit                                                                                                                                                                | ** ** | **(130,186**      | **)**      | **(123,462**          | **)**      |
| ** **                                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Total Stockholders’ Equity**                                                                                                                                                | ** ** | **52,296**        | ** ** | **58,205**            | ** ** |
| ** **                                                                                                                                                                         | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                                               | ** ** | **$**             | **68,108** | ** **            | **$**      | **73,685** | ** ** |

 

*See accompanying notes to condensed consolidatedfinancial statements*

 

----

*(1)**             **Derivedfrom audited financial statements in the Company’s annual report on Form 10-Kfor the year ended December 31, 2009*

 

2

----

Table of Contents

 

**Lime Energy Co.**

**Unaudited Condensed ConsolidatedStatements of Operations**

**(in thousands)**

 
| ** **                                                          | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                          | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                                                          | ** ** | **2010**                | ** ** | **2009**                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                |       |                    |       |                    |       |   |   |   |   |
| **Revenue**                                                         | ** ** | **$**                   | **17,508** | ** **              | **$**      | **15,795** | ** ** | **$** | **29,321** | ** ** | **$** | **29,520** | ** ** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of sales                                                       | ** ** | **13,319**              | ** ** | **12,953**              | ** ** | **23,273** | ** ** | **23,873** | ** ** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross Profit**                                                    | ** ** | **4,189**               | ** ** | **2,842**               | ** ** | **6,048** | ** ** | **5,647** | ** ** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and administrative                                 | ** ** | **6,094**               | ** ** | **5,549**               | ** ** | **12,527** | ** ** | **10,782** | ** ** |
| Amortization of intangibles                                         | ** ** | **163**                 | ** ** | **313**                 | ** ** | **325** | ** ** | **658** | ** ** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating Loss**                                                  | ** ** | **(2,068**              | **)**      | **(3,020**              | **)**      | **(6,804** | **)** | **(5,793** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other Income (Expense)                                              | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                     | ** ** | **48**                  | ** ** | **30**                  | ** ** | **98** | ** ** | **63** | ** ** |
| Interest expense                                                    | ** ** | **(8**                  | **)**      | **(427**                | **)**      | **(18** | **)** | **(903** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total other income (expense)                                        | ** ** | **40**                  | ** ** | **(397**                | **)**      | **80** | ** ** | **(840** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations before  discontinued operations     | ** ** | **(2,028**              | **)**      | **(3,417**              | **)**      | **(6,724** | **)** | **(6,633** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Discontinued Operations:**                                        | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from operation of discontinued business                        | ** ** | **—**              | ** ** | **(637**                | **)**      | **—** | ** ** | **(1,029** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Loss**                                                        | ** ** | **(2,028**              | **)**      | **(4,054**              | **)**      | **(6,724** | **)** | **(7,662** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Preferred Stock Dividends                                           | ** ** | **—**              | ** ** | **(646**                | **)**      | **—** | ** ** | **(1,202** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Loss Available to Common  Stockholders**                      | ** ** | **$**                   | **(2,028** | **)**                   | **$**      | **(4,700** | **)** | **$** | **(6,724** | **)** | **$** | **(8,864** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and diluted loss per common share from  continuing operations | ** ** | **$**                   | **(0.09**  | **)**                   | **$**      | **(0.31** | **)** | **$** | **(0.28** | **)** | **$** | **(0.65** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discontinued operations                                             | ** ** | **—**              | ** ** | **(0.05**               | **)**      | **—** | ** ** | **(0.09** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and Diluted Loss Per Common Share                             | ** ** | **$**                   | **(0.09**  | **)**                   | **$**      | **(0.36** | **)** | **$** | **(0.28** | **)** | **$** | **(0.74** | **)** |
| ** **                                                          | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted Average Common Shares Outstanding (in  thousands)          | ** ** | **23,609**              | ** ** | **13,069**              | ** ** | **23,601** | ** ** | **12,049** | ** ** |

 

*See accompanying notes to condensed consolidatedfinancial statements*

 

3

----

Table of Contents

 

**Lime Energy Co.**

**Statement of CondensedConsolidated Stockholders' Equity (Deficit)**

**(Unaudited)**

 
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **      | ** ** | **Total**              | ** **   |
|-------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|--------------|
| ** **                                            | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** **   |
| ** **                                            | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Deficit**     | ** ** | **Equity**             | ** **   |
|                                                  |       |       |       |       |       |           |       |            |       |                   |         |
| **Balance,**  December 31, 2009                  | ** ** | **23,511** | ** ** | **$**      | **2**      | ** **     | **$**      | **181,665**     | ** ** | **$**                  | **(123,462** | **)** | **$** | **58,205** | ** ** |
|                                                  |       |       |       |       |       |           |       |            |       |                   |         |
| Share based compensation                              |       | —     |       | —     |       | 743            |       | —          |       | 743                    |         |
|                                                  |       |       |       |       |       |           |       |            |       |                   |         |
| Shares issued for benefit plans and option  exercises |       | 129        |       | —     |       | 72             |       | —          |       | 72                     |         |
|                                                  |       |       |       |       |       |           |       |            |       |                   |         |
| Net loss for the six months ended June 30,  2010 |       | —     |       | —     |       | —         |       | (6,724          | )          | (6,724                 | )            |
|                                                  |       |       |       |       |       |           |       |            |       |                   |         |
| **Balance, June 30, 2010**                       | ** ** | **23,640** | ** ** | **$**      | **2**      | ** **     | **$**      | **182,480**     | ** ** | **$**                  | **(130,186** | **)** | **$** | **52,296** | ** ** |

** **

*See accompanying notes to condensed consolidatedfinancial statements.*

 

4

----

Table of Contents

 

**Lime Energy Co.**

**Unaudited Condensed ConsolidatedStatements of Cash Flows**

**(in thousands)**

 
| **Six Months Ended June 30,**                                                                  | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                |       |       |       |       |       |
| **Cash Flows from Operating  Activities**                                                           |       |       |       |       |       |
| Net Loss                                                                                            | ** ** | **$**      | **(6,724** | **)**      | **$**      | **(7,662** | **)** |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjustments to reconcile net loss to net cash used  in operating activities, net of assets acquired | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision for bad debts                                                                             | ** ** | **12**     | ** ** | **80**     | ** ** |
| Share based compensation                                                                            | ** ** | **743**    | ** ** | **910**    | ** ** |
| Preferred stock dividends                                                                           | ** ** | **—** | ** ** | **(1,202** | **)**      |
| Depreciation and amortization                                                                       | ** ** | **571**    | ** ** | **1,095**  | ** ** |
| Amortization of deferred financing costs                                                            | ** ** | **—** | ** ** | **1**      | ** ** |
| Amortization of issuance discount                                                                   | ** ** | **—** | ** ** | **495**    | ** ** |
| Accrued dividend satisfied through the issuance of  preferred stock                                 | ** ** | **—** | ** ** | **338**    | ** ** |
| Accrued interest satisfied through the issuance of  common stock                                    | ** ** | **—** | ** ** | **124**    | ** ** |
| PIK notes issued for interest                                                                       | ** ** | **—** | ** ** | **21**     | ** ** |
| Asset impairment                                                                                    | ** ** | **—** | ** ** | **503**    | ** ** |
| Loss on disposition of fixed assets                                                                 | ** ** | **8**      | ** ** | **—** | ** ** |
| Changes in assets and liabilities                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts receivable                                                                                 | ** ** | **1,622**  | ** ** | **4,534**  | ** ** |
| Inventories                                                                                         | ** ** | **(93**    | **)**      | **(137**   | **)**      |
| Costs and estimated earnings in excess of billings  on uncompleted contracts                        | ** ** | **115**    | ** ** | **(764**   | **)**      |
| Prepaid expenses and other                                                                          | ** ** | **(321**   | **)**      | **560**    | ** ** |
| Accounts payable                                                                                    | ** ** | **(559**   | **)**      | **(5,639** | **)**      |
| Accrued expenses                                                                                    | ** ** | **292**    | ** ** | **311**    | ** ** |
| Billings in excess of costs and estimated earnings  on uncompleted contracts                        | ** ** | **773**    | ** ** | **856**    | ** ** |
| Deferred revenue                                                                                    | ** ** | **—** | ** ** | **(90**    | **)**      |
| Customer deposits                                                                                   | ** ** | **(33**    | **)**      | **(424**   | **)**      |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash used in operating activities                                                               | ** ** | **(3,594** | **)**      | **(6,090** | **)**      |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows From Investing  Activities**                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Acquisition costs, net of cash acquired                                                             | ** ** | **—** | ** ** | **(614**   | **)**      |
| Proceeds from sale of fixed assets                                                                  | ** ** | **1**      | ** ** | **11**     | ** ** |
| Purchase of property and equipment                                                                  | ** ** | **(231**   | **)**      | **(202**   | **)**      |
| Increase in restricted cash                                                                         | ** ** | **(3,301** | **)**      | **—** | ** ** |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash used in investing activities                                                               | ** ** | **(3,531** | **)**      | **(805**   | **)**      |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows From Financing  Activities**                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (payments) advances on line of credit                                                           | ** ** | **—** | ** ** | **(1,850** | **)**      |
| Payments of long-term debt                                                                          | ** ** | **(141**   | **)**      | **(223**   | **)**      |
| Proceeds from issuance of common stock                                                              | ** ** | **72**     | ** ** | **10,703** | ** ** |
| Costs related to stock issuances                                                                    | ** ** | **—** | ** ** | **(796**   | **)**      |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash (used in) provided by financing  activities                                                | ** ** | **(69**    | **)**      | **7,834**  | ** ** |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net (Decrease) Increase in Cash  and Cash Equivalents**                                           | ** ** | **(7,194** | **)**      | **939**    | ** ** |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and Cash Equivalents, at beginning of period                                                   | ** ** | **22,870** | ** ** | **3,734**  | ** ** |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and Cash Equivalents, at end of period                                                         | ** ** | **$**      | **15,676** | ** ** | **$**      | **4,673** | ** ** |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

5

----

Table of Contents

 
| **As of  June 30,**                                                                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                 |       |     |       |     |       |
| **Supplemental Disclosure of Cash  Flow Information (in thousands)**                                 |       |     |       |     |       |
|                                                                                                 |       |     |       |     |       |
| Cash paid during the period for interest:                                                            |       |     |       |     |       |
| -     Continuing  operations                                                |       | $        | 18         |     | $          | 282 |   |
| -     Discontinued  operations                                              |       | —   |       | 1        |       |
|                                                                                                 |       |     |       |     |       |
| Interest obligation satisfied through the issuance  of common stock                                  |       | —   |       | 124      |       |
|                                                                                                 |       |     |       |     |       |
| Accrued earn-out satisfied through the issuance of  common stock                                     |       | —   |       | 293      |       |
|                                                                                                 |       |     |       |     |       |
| Satisfaction of accrued dividend through the  issuance of 8,233 shares of series A-1 preferred stock |       | —   |       | 338      |       |
|                                                                                                 |       |     |       |     |       |
| Extinguishment of line of credit                                                                     |       | —   |       | 21       |       |
|                                                                                                 |       |     |       |     |       |
| Issuance of line of credit note in satisfaction of  interest payable                                 |       | —   |       | 21       |       |
|                                                                                                 |       |     |       |     |       |
| Cash paid for preferred dividends                                                                    |       | —   |       | 506      |       |
|                                                                                                      |            |          |            |          |            |  |  |

 

6

----

 

Tableof Contents

 

Lime Energy Co.

Notesto Unaudited Condensed Consolidated Financial Statements

 

***Note 1 — Basis of Presentation***

 

Theaccompanying unaudited condensed consolidated financial statements (the “FinancialStatements”) of Lime Energy Co. (“Lime Energy” and, together with itssubsidiaries, the “Company”, “we”, “us” or “our”) have been prepared inaccordance with Rule 10-01 of Regulation S-X promulgated by the Securitiesand Exchange Commission (the “SEC”) and, therefore, do not include allinformation and footnotes necessary for a fair presentation of financialposition, results of operations and cash flows in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”).  In our opinion, however, the FinancialStatements contain all adjustments, consisting only of normal recurringadjustments, necessary to present fairly our financial position, results ofoperations and cash flows as of and for the interim periods.

 

Theresults of operations for the three months and six months ended June 30,2010 and 2009 are not necessarily indicative of the results to be expected forthe full year.

 

Forfurther information, refer to the audited financial statements and the relatedfootnotes included in the Lime Energy Co. Annual Report on Form 10-K forthe year ended December 31, 2009.

 

TheCompany disposed of the assets of its Maximum Performance Group, Inc. (“MPG”)subsidiary on August 10, 2009 and has reported the operating results forthis business as discontinued operations. Please see Note 4 for additional information regarding the discontinuedoperations.

 

***Note 2 - Stock-Based Compensation***

 

**StockOptions**

 

Acommittee of the Board of Directors grants stock options and restricted stockunder the Company’s 2008 Long Term Incentive Plan, as amended (the “Plan”). Allof the options have been granted at a price equal to or greater than the marketprice of the Company’s stock on the date of grant. Substantially all stockoption grants outstanding under the Plan vest ratably over three years andexpire 10 years from the date of grant. In addition to the Plan, the Companygives employees the right to purchase shares at a discount to the market priceunder its employee stock purchase plan (“ESPP”).  During the second quarter of 2010 the Companyissued options to certain employees that vest upon achievement of certainfinancial objectives in combination with a minimum market price for its commonstock during a five year period (the “Cliff Options”).  The Company assesses the probability ofachieving these objectives at the end of each month and recognizes expenseaccordingly. .  In addition to the Planand the ESPP, the Board of Directors grants restricted stock to non-employeedirectors under the Company’s 2010 Non-Employee Director Stock Plan (the “Directors’Plan”).  Restricted stock granted to dateunder the Directors’ Plan vests 50% on grant and 50% on the first anniversaryof grant if the director is still serving on the Board of Directors on thevesting date.

 

TheCompany accounts for employee share based awards in accordance with AccountingStandards Codification (ASC) 718. This pronouncement requires companiesto measure the cost of employee service received in exchange for a share basedaward based on the fair value of the award at the date of grant, with expenserecognized over the requisite service period, which is generally equal to thevesting period of the grant.

 

7

----

Table of Contents

 

Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

Thefollowing table summarizes the Company’s total share-based compensation expensefor the three-month period ended June 30, 2010:

 
| ** **                  | ** ** | **Three months ended June 30, 2010** | ** ** | **Three months ended June 30, 2009** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                  | ** ** | **Cost of**                                              | ** ** | ** **                                                    | ** ** | ** ** | ** ** | **Cost of** | ** ** | ** ** | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Sales**                                                     | ** ** | **SG&A**                                                  | ** ** | **Total** | ** ** | **Sales** | ** ** | **SG&A** | ** ** | **Operations** | ** ** | **Total** | ** ** |
|                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Stock options               |       | $                                                             | 4          |                                                          | $          | 263 |   | $ | 267 |   | $ | 20 |   | $ | 379 |   | $ | 2 |   | $ | 401 |   |
|                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock            |       | —                                                        |       | 90                                                            |       | 90 |   | — |   | — |   | — |   | — |   |
|                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Employee Stock Purchse Plan |       | —                                                        |       | 11                                                            |       | 11 |   | — |   | 29 |   | — |   | 29 |   |
|                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
|                        |       | $                                                             | 4          |                                                          | $          | 364 |   | $ | 368 |   | $ | 20 |   | $ | 408 |   | $ | 2 |   | $ | 430 |   |

 

Thefollowing table summarizes the Company’s total share-based compensation expensefor the six-month period ended June 30, 2010:

 
| ** **                  | ** ** | **Six months ended June 30, 2010** | ** ** | **Six months ended June 30, 2009** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                  | ** ** | **Cost of**                                            | ** ** | ** **                                                  | ** ** | ** ** | ** ** | **Cost of** | ** ** | ** ** | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Sales**                                                   | ** ** | **SG&A**                                                | ** ** | **Total** | ** ** | **Sales** | ** ** | **SG&A** | ** ** | **Operations** | ** ** | **Total** | ** ** |
|                        |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Stock options               |       | $                                                           | 9          |                                                        | $          | 563 |   | $ | 572 |   | $ | 54 |   | $ | 806 |   | $ | 8 |   | $ | 868 |   |
|                        |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock            |       | —                                                      |       | 145                                                         |       | 145 |   | — |   | — |   | — |   | — |   |
|                        |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Employee Stock Purchse Plan |       | —                                                      |       | 26                                                          |       | 26 |   | — |   | 42 |   | — |   | 42 |   |
|                        |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
|                        |       | $                                                           | 9          |                                                        | $          | 734 |   | $ | 743 |   | $ | 54 |   | $ | 848 |   | $ | 8 |   | $ | 910 |   |

 

TheCompany uses an Enhanced Hull-White Trinomial model to value its employeeoptions.  The weighted-average,grant-date fair value of stock options granted to employees and theweighted-average significant assumptions used to determine those fair values,using an Enhanced Hull-White Trinomial model for stock options under ASC 718,are as follows:

 
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                           |       |                                  |       |                                |       |   |   |   |   |
| Weighted average fair-value per option granted |       | $                                     | 1.96       |                                | $          | 1.45 |   | $ | 1.99 |   | $ | 1.94 |   |
|                                           |       |                                  |       |                                |       |   |   |   |   |
| Significant assumptions (weighted average):    |       |                                  |       |                                |       |   |   |   |   |
| Risk-free rate                                 |       | 0.16                                  | %          | 0.21                                | %          | 0.13 | % | 0.09 | % |
| Dividend yield                                 |       | 0.00                                  | %          | 0.00                                | %          | 0.00 | % | 0.00 | % |
| Expected volatility                            |       | 80.3                                  | %          | 82.1                                | %          | 81.2 | % | 83.8 | % |
| Expected life (years) (1)                      |       | 7.5                                   |       | 5.9                                 |       | 7.0 |   | 5.5 |   |
| Expected turn-over rate                        |       | 9.41                                  | %          | 17.00                               | %          | 9.25 | % | 12.31 | % |
| Expected exercise multiple                     |       | 2.20                                  |       | 2.20                                |       | 2.20 |   | 2.20 |   |
|                                                |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

----

(1)         The Company continues to use the simplified methodto estimate expected term due to the historical structural changes to itsbusiness such that historical exercise data may no longer provide a reasonablebasis on which to estimate expected term.

 

8

----

Table of Contents

 

Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

Therisk-free interest rate is based on the U.S. Treasury Bill rates at the time ofgrant. The dividend yield reflects the fact that the Company has never paid adividend on its common stock and does not expect to in the foreseeable future.The Company estimated the volatility of its common stock at the date of grantbased on the historical volatility of its stock. The expected term of theoptions is based on the simplified method as described in the Staff AccountingBulletin No. 107, which is the average of the vesting term and theoriginal contract term.  The expectedturn-over rate represents the expected forfeitures due to employee turnover andis based on historical rates experienced by the Company.  The expected exercise multiple represents themean ratio of the stock price to the exercise price at which employees are expectedto exercise their options and is based on an empirical study completed by S.Huddart and M. Lang (1996).

 

Optionactivity under the Company’s stock option plans as of June 30, 2010 andchanges during the three months then ended are presented below:

 
| ** **                                | ** ** | **Shares** | ** ** | **Exercise Price Per  Share** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
|-------------------------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
|                                      |       |       |       |                                    |       |                                       |       |
| Outstanding at March 31, 2010        |       | 2,699,792  |       | $3.30 - $1,363.95                       |       | $                                          | 8.37       |   |
|                                      |       |       |       |                                    |       |                                       |       |
| Granted                                   |       | 720,000    |       | $4.50 - $4.50                           |       | $                                          | 4.50       |   |
| Exercised                                 |       | —     |       |                                    |       | —                                     |       |
| Forfeited                                 |       | (23,114    | )          | $3.50 - $787.50                         |       | $                                          | 63.98      |   |
|                                      |       |       |       |                                    |       |                                       |       |
| Outstanding at June 30, 2010         |       | 3,396,678  |       | $3.30 - $1,363.95                       |       | $                                          | 7.17       |   |
|                                      |       |       |       |                                    |       |                                       |       |
| Options exercisable at June 30, 2010 |       | 1,991,695  |       | $3.30 - $1,363.95                       |       | $                                          | 8.78       |   |

 

Optionactivity under the Company’s stock option plans as of June 30, 2010 andchanges during the six months then ended are presented below:

 
| ** **                                | ** ** | **Shares** | ** ** | **Exercise Price Per  Share** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
|-------------------------------------------|------------|------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
|                                      |       |       |       |                                    |       |                                       |       |
| Outstanding at December 31, 2009     |       | 2,441,344  |       | $3.29 - $1,363.95                       |       | $                                          | 9.66       |   |
|                                      |       |       |       |                                    |       |                                       |       |
| Granted                                   |       | 1,021,638  |       | $4.42 - $4.96                           |       | $                                          | 4.48       |   |
| Exercised                                 |       | (15,061    | )          | $3.29 - $3.30                           |       | $                                          | 3.30       |   |
| Forfeited                                 |       | (51,243    | )          | $3.50 - $945.00                         |       | $                                          | 73.10      |   |
|                                      |       |       |       |                                    |       |                                       |       |
| Outstanding at June 30, 2010         |       | 3,396,678  |       | $3.30 - $1,363.95                       |       | $                                          | 7.17       |   |
|                                      |       |       |       |                                    |       |                                       |       |
| Options exercisable at June 30, 2010 |       | 1,991,695  |       | $3.30 - $1,363.95                       |       | $                                          | 8.78       |   |

 

9

----

Table of Contents

 

Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

Thefollowing table summarizes information about stock options outstanding at June 30,2010:

 
| ** **              | ** ** | **Options Outstanding**                         | ** ** | **Options Exercisable**                        | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Number  Outstanding  at June 30,  2010** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable at  June 30, 2010** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| $3.30 - $4.00           |       | 626,856                                              |       | 7.2 years                                           |       | $ | 3.48 |   | 363,999 |   | $ | 3.45 |   |
| $4.01 - $6.00           |       | 1,078,639                                            |       | 9.7 years                                           |       | $ | 4.50 |   | 67,861 |   | $ | 4.73 |   |
| $6.01 - $8.00           |       | 1,305,194                                            |       | 6.3 years                                           |       | $ | 7.07 |   | 1,291,527 |   | $ | 7.06 |   |
| $8.01 - $10.00          |       | 19,569                                               |       | 7.7 years                                           |       | $ | 9.15 |   | 17,836 |   | $ | 9.20 |   |
| $10.01 - $20.00         |       | 353,561                                              |       | 7.3 years                                           |       | $ | 11.15 |   | 237,613 |   | $ | 11.15 |   |
| $20.01 - $1,363.95      |       | 12,859                                               |       | 1.5 years                                           |       | $ | 310.13 |   | 12,859 |   | $ | 310.13 |   |
|                    |       |                                                 |       |                                                |       |   |   |   |   |   |   |
| $3.30 - $1,363.95       |       | 3,396,678                                            |       | 7.6 years                                           |       | $ | 7.17 |   | 1,991,695 |   | $ | 8.78 |   |

 

Theaggregate intrinsic value of the outstanding options (the difference betweenthe closing stock price on the last trading day of the second quarter of 2010of $3.43 per share and the exercise price, multiplied by the number ofin-the-money options) that would have been received by the option holders hadall option holders exercised their options on June 30, 2010 wasapproximately $22,000. The aggregate intrinsic value of exercisable options asof June 30, 2010 was approximately $22,000.  These amounts will change based on changes inthe fair market value of the Company’s common stock.

 

Asof June 30, 2010, there was approximately $774,000 of total unrecognizedcompensation cost related to stock options which is expected to be recognizedover a weighted-average period of 1.0 year and unrecognized cost of $280,000related to restricted stock which will be recognized over a weighted-averageperiod of 10 months.  In addition, therewas approximately $1.4 million of unrecognized expense related to the CliffOptions which may be recognized over the next 4.5 years.

 

***Note 3 — Acquisition of Advanced Biotherapy, Inc.***

 

OnMarch 3, 2009, the Company exchanged 2,252,341 shares of its common stockfor 1,060,421,884 shares of Advanced Biotherapy, Inc. (“ADVB”) held bycertain stockholders of ADVB (the “Sellers”) representing approximately 90.8%of ADVB’s issued and outstanding shares pursuant to a Stock Purchase Agreementdated November 18, 2008.  TheCompany then completed a short-form merger in which it merged ADVB with and intoa newly formed merger subsidiary, with the merger subsidiary continuing as thesurviving entity.  Upon the closing ofthe merger the Company obtained access to ADVB’s assets, includingapproximately $7.4 million of cash and a revolving credit note issued by theCompany that had an outstanding balance of $42,000 and accrued interest payableof $28,000.  Upon the closing of thetransaction the Company has cancelled the revolving credit note anddiscontinued the operations of ADVB.

 

10

----

Table of Contents

 

Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

ADVB had no revenuegenerating operations and did not have employees capable of developing aproduct that would be considered a business. Therefore the Company did notconsider ADVB a business as defined by Regulation S-X, Rule 11-01(d) orby generally accepted accounting principles. Consequently, the merger was notaccounted for as a business combination under the guidance of ASC 805, BusinessCombinations.  The substance of the ADVBacquisition includes two distinct events. First, as a result of thetransaction, the Company has settled the amounts due to ADVB under itsrevolving credit note (see Note 7).  Inaddition, the Company received approximately $7.4 million of cash in exchangefor the shares of common stock it issued in connection with the ADVBacquisition. As a result of the merger, the Company eliminated any debt due toADVB, recorded the assets acquired (consisting primarily of cash and cashequivalents) at fair value and credited equity for the value of its commonshares issued in connection with the ADVB acquisition.

 

***Note 4 — Discontinued Operations***

 

On August 10, 2009,the Company sold its Energy Technology business.  During the quarter ended June 30, 2009,in anticipation of the sale of the Energy Technology business, the Companyreduced the carrying value of the related assets to their expected fair value,incurring an impairment loss of $503,000. The Company has reported the operating results of this business for thethree-month and six-month periods ended June 30, 2009 as discontinuedoperations in the accompanying financial statements.

 

***Note 5 — Recent Accounting Pronouncements***

 

In June 2009, theFASB issued Accounting Standards Codification (“ASC”) 810, “Amendment to FASBInterpretation No. 46(R)” to revise the approach to determine when avariable interest entity (VIE) should be consolidated. The new consolidationmodel for VIEs considers whether the Company has the power to direct theactivities that most significantly impact the VIE’s economic performance andshares in the significant risks and rewards of the entity. The guidance on VIE’srequires companies to continually reassess VIEs to determine if consolidationis appropriate and provide additional disclosures. The guidance is effectivefor the Company’s 2010 fiscal year. The adoption of this statement did not havea material impact on the Company’s consolidated results of operations andfinancial condition.

 

ASC 605-25—In October 2009,the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsUpdate (“ASU”) No. 2009-13 for updated revenue recognition guidance underthe provisions of ASC 605-25, “Multiple-Element Arrangements”. The previousguidance has been retained for criteria to determine when delivered items in amultiple-deliverable arrangements should be considered separate units ofaccounting, however the updated guidance removes the previous separationcriterion that objective and reliable evidence of fair value of any undelivereditems must exist for the delivered items to be considered a separate unit orseparate units of accounting. This guidance is effective for fiscal yearsbeginning on or after June 15, 2010. The Company does not expect that theadoption of this guidance will have a material effect on the Company’sconsolidated results of operations, financial position or cash flows.

 

ASC 820—In January 2010,the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures(Topic 820): Improving Disclosures About Fair Value Measurements.” Thisguidance amends Subtopic 820-10 to require new disclosures and clarify existingdisclosures. This guidance 

 

11

----

Table of Contents

 

Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

requires new disclosuresof amounts and reasons for significant transfers between Level 1 and Level 2fair value measurements. Additionally, in the reconciliation for fair valuemeasurements using significant unobservable inputs (Level 3), separatepresentation of information about purchases, sales, issuances and settlementsis required. The guidance clarifies that fair value measurement disclosures foreach class of assets and liabilities may constitute a subset of assets andliabilities within a line item on a reporting entity’s balance sheet. Theguidance also clarifies disclosure requirements about inputs and valuationtechniques for both recurring and nonrecurring fair value measurements (Level 2or Level 3). The ASU also amends guidance on employers’ disclosures aboutpostretirement benefit plan assets under ASC 715 to require that disclosures beprovided by classes of assets instead of by major categories of assets. The newdisclosures and clarifications of existing disclosures are effective forinterim and annual reporting periods beginning after December 15, 2009,except for the disclosures about purchases, sales, issuances and settlements inthe roll forward of activity for Level 3 fair value measurements. Thosedisclosures are effective for fiscal years beginning after December 15,2010, including interim periods within those fiscal years. The Company does notexpect that the adoption of this guidance will have a material effect on theCompany’s consolidated results of operations, financial position or cash flows.

 

***Note 6 — Net Loss Per Share***

 

TheCompany computes loss per share under Statement of Financial AccountingStandards (SFAS) No. 128 “Earnings Per Share,” which requires presentationof two amounts: basic and diluted loss per common share. Basic loss per commonshare is computed by dividing loss available to common stockholders by thenumber of weighted average common shares outstanding, and includes all commonstock issued.  Diluted earnings wouldinclude all common stock equivalents. The Company has not included the outstanding options, warrants or sharesissuable upon conversion of the convertible debt as common stock equivalents inthe computation of diluted loss per share for the three and six months ended June 30,2010 and 2009 because the effect would be antidilutive.

 

Thefollowing table sets forth the weighted average shares issuable upon exerciseof outstanding options and warrants and conversion of convertible debt that arenot included in the basic and diluted loss per share available to commonstockholders because to do so would be antidilutive:

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                              | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                              | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                    |       |                   |       |                 |       |   |   |   |   |
| Weighted average shares issuable upon exercise of  outstanding options  |       | 3,283,482              |       | 2,595,618            |       | 2,998,217 |   | 2,522,399 |   |
|                                                                    |       |                   |       |                 |       |   |   |   |   |
| Weighted average shares issuable upon exercise of  outstanding warrants |       | 797,571                |       | 773,442              |       | 802,605 |   | 741,302 |   |
|                                                                    |       |                   |       |                 |       |   |   |   |   |
| Weighted average shares issuable upon conversion  of convertible debt   |       | —                 |       | 714,286              |       | — |   | 714,286 |   |
|                                                                    |       |                   |       |                 |       |   |   |   |   |
| Total                                                                   |       | 4,081,053              |       | 4,083,346            |       | 3,800,822 |   | 3,977,987 |   |

 

12

----

Table of Contents

 

Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

***Note 7 — Revolving Line of Credit***

 

OnMarch 12, 2008, the Company entered into a revolving line of credit notewith Advanced Biotherapy, Inc. (“ADVB”) and Richard Kiphart, the Company’sChairman and largest individual investor. On November 14, 2008, Mr. Kiphart agreed to convert his noteinto shares of the Company’s Series A-1 preferred stock.  On November 18, 2008, the Companyentered an agreement to acquire 90.8% of the shares of ADVB and it completed ashort-form merger on March 3, 2009, whereby it merged ADVB with a newlycreated acquisition subsidiary. Following the merger it canceled the outstanding balance of $42,000 andaccrued interest of $28,000 on the ADVB line of credit.

 

***Note 8 — Subordinated Convertible Term Notes***

 

Duringthe second quarter of 2007, eight investors, including Richard Kiphart, theCompany’s Chairman and largest individual stockholder (collectively the “Investors”),and the Company entered into a loan agreement under which the Investors lentthe Company $5 million in the form of subordinated convertible term notes (the “TermNotes”).  Before the conversion discussedbelow, the Term Notes were to mature on May 31, 2010, and accrued interestat the rate of 10% per year.  Interestwas payable quarterly, 50% in cash and 50% in shares of the Company’s commonstock valued at the market price of the Company’s common stock on the interestdue date.

 

Aspart of the transaction, the Company issued the Investors four-year warrants topurchase 206,044 shares of its common stock at $7.28 per share.  These warrants were valued at $1,137,000utilizing a modified Black-Scholes option pricing model utilizing the followingassumptions: risk free rate of 4.846%; expected volatility of 93.3%; expecteddividend of $0; and expected life of four years.

 

Inrecording the transaction, the Company allocated the value of the proceeds tothe Term Notes and warrants based on their relative fair values.  In doing so, it determined that the TermNotes contained a beneficial conversion feature since the fair market value ofthe common stock issuable upon conversion of the Term Notes (determined on theTerm Note issuance date) exceeded the value allocated to the Term Notes of$3,863,000.  The Term Notes wereconvertible into 714,286 shares of common stock, which at the market price of$8.02 per share on date of issuance of the Term Notes was worth$5,730,000.  The difference between themarket value of the shares issuable upon conversion and the value allocated tothe Term Notes of $1,867,000 was considered to be the value of the beneficialconversion feature.

 

Thevalue of the beneficial conversion feature and the value of the warrants wererecorded as a discount to the Term Notes which was then amortized over the termof the Term Notes using the effective interest method.  Amortization of the discount of $249,000 and$495,000 was included in interest expense during the three-month and six-monthperiods ended June 30, 2009.

 

Inaddition, the Company incurred costs of $9,000 relative to the Term Noteoffering.  These costs were capitalizedand were also being amortized over the term of the Term Notes using theeffective interest method.  Amortizationof the deferred issuance costs of $1,000 was included in interest expenseduring the three-month and six-month periods ended June 30, 2009.

 

13

----

Table of Contents

 

Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

OnAugust 10, 2009, the Company and Mr. Kiphart agreed to convert hisTerm Notes, totaling $3.1 million, into 484,375 shares of the Company’s commonstock at the prior day’s closing market price of $6.40 per share.  Also on August 10, 2009, the holders ofthe remaining Term Notes all elected to convert their notes into common stockupon the closing of the then pending underwritten public offering at the lowerof the offering price less the underwriters’ discount and the stated conversionprice of the notes of $7.00 per share. The public follow-on offering closed on September 25, 2009, atwhich time the $1.9 million in Term Notes were converted into 367,504 shares ofcommon stock.

 

***Note 9 — The November 2008 PIPE Transaction***

 

On November 13,2008, the Company entered into Subscription Agreements with 15 investors tosell 1,787,893 units, each comprised of one share of the Company’s common stockand a warrant to purchase an additional quarter share of common stock (the “Units”).  The sale price was $3.51 per Unit, which wasequal to 75% of the volume-weighted average price of the Company’s stock forthe ten days prior to closing.  Thewarrants allow holders to purchase a share of common stock for $4.10 per share,which was the closing price of the Company’s common stock on the day prior tothe closing, and the warrants are exercisable any time after May 13, 2009and before November 13, 2011.  Thetotal gross proceeds raised in the offering were $6,275,500.

 

The private offeringclosed in two tranches: tranche A, which was comprised of unaffiliatedinvestors; and tranche B which was comprised of affiliated investors, primarilyexecutive officers and directors of the Company.  The Company raised $3,000,500 in tranche A,which closed on November 13, 2008 and $3,275,000 in tranche B, whichclosed on January 30, 2009. The issuance of the Units sold in tranche Brequired approval by holders of a majority of the Company’s outstanding votingstock pursuant to the NASDAQ Marketplace Rules. The Company received the written consent in lieu of a meeting ofstockholders from the holders of shares representing 58.7% of the totaloutstanding shares of its common stock on November 13, 2008, which wassufficient under the Delaware General Corporation Law, the Company’s By-Lawsand the NASDAQ Marketplace Rules to approve the transaction.

 

Securities and ExchangeCommission rules require that any corporate actions requiring thestockholder approval that are approved pursuant to a written consent in lieu ofa meeting be communicated to all stockholders via an Information Statement andthat the corporate action so approved cannot take place until at least 20 daysfollowing the mailing or giving of the Information Statement tostockholders.  The Company mailed anInformation Statement to all of its stockholders on December 31, 2008informing them of the November 13, 2008 written consent in lieu of ameeting.

 

***Note 10 — Preferred Stock***

 

OnNovember 14, 2008, Richard Kiphart agreed to convert his $14.5 millionrevolving line of credit note and $207,104 of accrued interest into 358,710shares of Series A-1 preferred stock. Each outstanding share of preferred stock was entitled to cumulativequarterly dividends at a rate of (i) 15% per annum of its stated value(which was $41.00) on or prior to March 31, 2009 (9% in cash and 6% inadditional shares of preferred stock); and (ii) 17% per annum of itsstated value, at any time on or after April 1, 2009 (9% in cash and 8% inadditional shares of preferred stock). The preferred stock was convertible at the 

 

14

----

Table of Contents

 

Lime Energy Co.

Notes to Unaudited CondensedConsolidated Financial Statements

 

holder’selection any time after December 31, 2009 into shares of the Company’scommon stock at the rate of 10 shares of common stock for each share ofpreferred stock.

 

OnAugust 10, 2009, to facilitate the anticipated public offering of itscommon stock, the Company and Mr. Kiphart converted his Series A-1preferred stock into 3,777,705 shares of the Company’s common stock.  Following this conversion there were noshares of Series A-1 Preferred Stock outstanding.

 

***Note 11 — Business Segment Information***

 

TheCompany is made up of 17 separate companies, but with the sale of the EnergyTechnology business in August 2009, all of the remaining businessesoperate in the same business segment, the Energy Efficiency Services segment.

 

***Note 12 — Other Equity Issuances***

 

(a)         During the first quarter of2010, holders of options to purchase 15,061 shares of the Company’s commonstock exercised their options on a cashless basis, exchanging 9,626 shares theywere entitled to purchase pursuant to the options to satisfy the exerciseprice, receiving 5,435 shares in exchange.

 

(b)         During the first quarter of2010 the Company issued 81,494 shares of restricted stock to its executiveofficers.  These shares vest ratably on December 31,2010, 2011 and 2012 if the executive is still employed by the Company on thevesting date.

 

(c)          During the first six monthsof 2010, the Company issued 70 shares of its common stock to employees underits Employee Recognition Program.

 

(d)         During June 2010,following stockholder approval of the 2010 Non-Employee Directors’ Stock Plan,the Company granted 18,359 shares of its common stock to five of its outsidedirectors that participate on various Board committees.  These shares vest 50% on grant and 50% on thefirst anniversary of grant if the director is still serving on the Company’sboard of directors on the vesting date.

 

(e)          During June 2010,the Company received $72,039 and in exchange issued 24,420 shares of its commonstock to employees who participated in its Employee Stock Purchase Plan.

 

15

----

Table of Contents

 
| ITEM 2. | **MANAGEMENT’S DISCUSSION AND ANALYSIS**               |   |
|---------|-------------------------------------------------------------|--------|
|    | **OF FINANCIAL CONDITION AND********RESULTS OF OPERATIONS** |   |

 

Youshould read the following discussion regarding the Company along with ourfinancial statements and related notes included in this quarterly report.  This quarterly report, including thefollowing discussion, contains forward-looking statements that are subject torisks, uncertainties and assumptions. Our actual results, performance and achievements in 2010 and beyond maydiffer materially from those expressed in, or implied by, these forward-lookingstatements.  See Cautionary NoteRegarding Forward-Looking Statements.

 

**Overview**

 

Weare a leading provider of energy efficiency solutions. Our services includeintegrated energy engineering, consulting and implementation of solutions whichenable our customers to reduce their facilities’ energy consumption, lowertheir operating and maintenance costs and reduce their carbon footprint. Wefocus on solutions which include lighting, mechanical and electrical upgradeservices, water conservation, weatherization and renewable project developmentand implementation. We provide these solutions across a wide range offacilities including high-rise office buildings, manufacturing plants, retailsites, mixed use complexes and large government sites. We operate in three specific markets: the commercial and industrial(C&I) market, the utility market and the public sector market.  In the C&I market we sell directly tocommercial and industrial clients.  Inthe utility market we provide program implementation services for utility demandside management programs.  In the publicsector market we work with energy service companies (“ESCOs”) and act as aprime contractor to the federal government for select contract opportunitiesthat align with our implementation capabilities.

 

Weoffer our clients a full range of services to address the energy efficiencyneeds of their facilities based on our ability to identify and deliversignificant return on our clients’ investments, improve the quality of theirphysical workspaces, maximize their operational savings and reduce theirmaintenance costs. Our turnkey services include**:**

 

·                  *Energy Engineering and Consulting*:  We apply our engineering expertise to analyzeclient’s energy consumption and operational needs and develop customized energyefficiency and renewable energy solutions. Our energy engineering and consulting services include sustainabilityconsulting, energy master planning, project development services, designengineering and building e-commissioning. We also provide design review and analysis of new construction projects tomaximize energy efficiency and sustainability, project management ofenergy-related construction, and processing and procurement of incentive andrebate applications.

 

·                  *Implementation:*  We provide complete turnkey implementationservices for a range of energy efficiency and renewable energy projects,including energy efficient lighting upgrades, energy efficiency mechanical andelectrical retrofit and upgrade services, water conservation, weatherizationand renewable project development and implementation, including solar, biomassand geothermal.  We consider factors suchas current facility infrastructure, best available technologies, buildingenvironmental conditions, hours of operation, energy costs, available utilityrebates and tax incentives, and installation, operation and maintenance costsof various efficiency alternatives.  Ourprofessionals’ extensive knowledge in energy efficiency solutions enables us toapply the most appropriate, effective and proven technologies available in themarketplace.

 

16

----

 

Table of Contents

 

Weserve a wide range of commercial, industrial, utility and public sectorclients.  Our commercial and industrialclients include many Fortune 500 companies for which we provide our energyefficiency solutions directly.  We alsowork for a number of utilities for which we manage energy efficiency portfolioprojects. In late 2009 we won our first contract to provide utility programmanagement services for National Grid. Under this contract we provide program marketing, project developmentand engineering, material procurement, database administration and turnkeyproject implementation services in an exclusive territory in western New Yorkfor its small business customers with demand of 100kw or less.  Since winning this first contract we havebegun working under similar contracts with two other utilities in three otherterritories in the Northeast.  Our publicsector clients include federal, state and local government agencies andeducational institutions, which we serve through our relationships with ESCOsand directly.  ESCOs are awarded projectcontracts with the public sector, and we provide energy efficiency expertise todevelop and implement tailored solutions under these contracts.  In addition, during the third quarter of 2009we became one of three companies qualified to bid directly under the US ArmyCorp. of Engineers’ Facility Repair and Renewal (FRR) program.  As a result, we are now able to work directlyon federal government projects under the FRR program.

 

In August 2009 we sold the assets of our Maximum Performance Group, Inc.subsidiary, which made up our Energy Technology business segment in order tofocus on our core Energy Efficiency Services business.  The Energy Technology segment, whichrepresented approximately 4% of our 2008 revenue, offered a patented line ofheating, ventilation and air conditioning and lighting controllers under theeMAC and uMAC brand names.

 

**Results of Operations**

 

*Revenue*

 

Wegenerate the majority of our revenue from the sale of our services and productsthat we purchase and resell to our clients. The substantial majority of our revenue is derived from fixed-pricecontracts, although we occasionally bill on a time-and-materials basis. Underfixed-price contracts, we bill our clients for each project once the project iscompleted or throughout the project as specified in the contract. Undertime-and-materials arrangements, we bill our clients on an hourly basis withmaterial costs and other reimbursable expenses passed through and recognized asrevenue. Our projects take a couple days to a year or more to complete withprojects in our commercial and industrial markets typically taking less time tocomplete than the larger projects in our public sector markets.  We recognize the revenue on smaller, shorterterm projects on a completed contract basis and on larger, longer projects weutilize the percentage of completion method for revenue recognition. All of ourrevenue is earned in the United States.

 

*Gross Profit*

 

Gross profit equals our revenueless costs of sales. The cost of sales for our business consists primarily ofmaterials, our internal labor, including engineering, and the cost ofsubcontracted labor.

 

17

----

Table of Contents

 

Gross profit is a key metric thatwe use to examine our performance. Gross profit depends in large part on thevolume and mix of products and services that we sell during any given period.

 

*Selling, General andAdministrative Expenses*

 

Selling,general and administrative expenses (“SG&A”) include the followingcomponents:

 

·                                          direct labor and commissioncosts related to our employee sales force;

 

·                                          costs of our non-productionmanagement, supervisory and staff salaries and employee benefits, including thecosts of share-based compensation;

 

·                                          costs related to insurance,travel and entertainment, office supplies and utilities;

 

·                                          costs related to marketingand advertising our products;

 

·                                          legal and accountingexpenses; and

 

·                                          costs related toadministrative functions that serve to support our existing businesses, as wellas to provide the infrastructure for future growth.

 

*Amortization of Intangibles*

 

Whenwe acquire companies we allocate the purchase price to tangible assets (such asproperty, equipment, accounts receivable, etc.), identifiable intangibleassets (such as contract backlogs, customer lists, technology, trade name, etc.),with the balance recorded as goodwill. We amortize the value of certain intangible assets over their estimateduseful lives as a non-cash expense.

 

*Other Expense*

 

Otherexpense consists of interest expense, net of interest earned on ourinvestments. Interest expense represents the interest costs and fees associatedwith the mortgage on our headquarters and various vehicle loans, and forperiods prior to 2010, our subordinated convertible term notes (includingamortization of the related debt discount and issuance costs), notes payableand our lines of credit. Interest income includes earnings on our invested cashbalances and amortization of the discount on our long term receivables.

 

*DividendExpense*

 

Dividendexpense includes dividends accrued on our Series A-1 preferred stock.  All of the Series A-1 preferred stockwas converted to common stock on August 10, 2009.

 

18

----

Table of Contents

 

**Three months Ended June 30, 2010 Compared to Threemonths Ended June 30, 2009**

 

***Consolidated Results***

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                | ** ** | **June 30,**      | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **2010**               | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
|                                      |       |                   |       |       |       |   |   |   |   |
| Revenue                                   |       | $                      | 17,508     |       | $          | 15,795 |   | $ | 1,713 |   | 10.8 | % |
| Cost of sales                             |       | 13,319                 |       | 12,953     |       | 366 |   | 2.8 | % |
| Gross profit                              |       | 4,189                  |       | 2,842      |       | 1,347 |   | 47.4 | % |
|                                      |       |                   |       |       |       |   |   |   |   |
| Selling, general and administrative       |       | 6,094                  |       | 5,549      |       | 545 |   | 9.8 | % |
| Amortization of intangibles               |       | 163                    |       | 313        |       | (150 | ) | -47.9 | % |
| Operating Loss                            |       | (2,068                 | )          | (3,020     | )          | 952 |   | -31.5 | % |
|                                      |       |                   |       |       |       |   |   |   |   |
| Other income (expense)                    |       | 40                     |       | (397       | )          | 437 |   | -110.1 | % |
| Loss from continuing operations           |       | (2,028                 | )          | (3,417     | )          | 1,389 |   | -40.6 | % |
|                                      |       |                   |       |       |       |   |   |   |   |
| Loss from discontinued operations         |       | —                 |       | (637       | )          | 637 |   | -100.0 | % |
| Net loss                                  |       | $                      | (2,028     | )          | $          | (4,054 | ) | $ | 2,026 |   | -50.0 | % |
|                                      |       |                   |       |       |       |   |   |   |   |
| Preferred stock dividends                 |       | —                 |       | (646       | )          | 646 |   | -100.0 | % |
| Net loss available to common stockholders |       | $                      | (2,028     | )          | $          | (4,700 | ) | $ | 2,672 |   | -56.9 | % |

 

The following table presents the percentage ofcertain items to revenue:

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **June 30,**      | ** ** |
| ** **                                | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                      |       |                   |       |   |   |
| Revenue                                   |       | 100.0                  | %          | 100.0 | % |
| Cost of sales                             |       | 76.1                   | %          | 82.0 | % |
| Gross profit                              |       | 23.9                   | %          | 18.0 | % |
|                                      |       |                   |       |   |   |
| Selling, general and administrative       |       | 34.8                   | %          | 35.1 | % |
| Amortization of intangibles               |       | 0.9                    | %          | 2.0 | % |
| Operating Loss                            |       | -11.8                  | %          | -19.1 | % |
|                                      |       |                   |       |   |   |
| Other income (expense)                    |       | 0.2                    | %          | -2.5 | % |
| Loss from continuing operations           |       | -11.6                  | %          | -21.6 | % |
|                                      |       |                   |       |   |   |
| Loss from discontinued operations         |       | 0.0                    | %          | -4.0 | % |
| Net loss                                  |       | -11.6                  | %          | -25.7 | % |
|                                      |       |                   |       |   |   |
| Preferred stock dividends                 |       | 0.0                    | %          | -4.1 | % |
| Net loss available to common stockholders |       | -11.6                  | %          | -29.8 | % |

 

19

----

Table of Contents

 

***Revenue.***  Our consolidated revenue for the three-monthperiod ended June 30, 2010 increased $1.7 million or 10.8%, to $17.5million from $15.8 million for the same period during 2009.  Contributing to this increase was $4.5million in revenue from our new utility program management initiative and $1.2million earned under our FRR contract. Both of these businesses are new initiatives we began in late 2009 andboth started generating meaningful revenue earlier this year.  Revenue in our C&I markets declinedapproximately $400 thousand, while revenue from our public sector marketsdeclined approximately $3.6 million.  We believethat the decline in revenue from our public sector markets was primarily theresult of uncertainty regarding financing sources for public sectorclients.  We believe these issues havebegun to be resolved and should not have as much impact on revenue in futureperiods.

 

We expect conditions in our C&I and publicsector markets to improve during the balance of the year, resulting in highersales from these markets for the balance of 2010.  We also expect continued growth from ourutility program management and direct government initiatives, neither of whichcontributed materially to 2009 revenue. The combination of these factors is expected to result in higher revenueduring the third and fourth quarters of 2010 when compared to both the firsthalf of 2010 and the third and fourth quarters of 2009.

 

***Gross Profit. ***Our gross profit for the second quarter of 2010 was $4.2 million, a $1.4million or 47.4% increase when compared to the $2.8 million in gross profitearned during the second quarter of 2009. Our gross profit increased as a result of the increase in our revenue incombination with a higher gross margin earned on sales.  Our gross margin for the second quarter of2010 was 23.9%, compared to 18.0% for the same period during 2009.  Contributing to the increase in our grossmargin was the revenue earned from our new utility program management division,as well as a mix of work in our C&I market that included a large amount ofhigher margin engineering work.  TheseC&I engineering projects were completed in advance of separately awardedimplementation work which generally carries lower gross margins on higherrevenue.  This implementation work isexpected to be completed during the third and fourth quarters of this year,which will contribute to reduce consolidated gross margins in these futureperiods.  In addition, as our directgovernment work under the FRR contract continues to grow it will alsocontribute to reduce our consolidated gross margin as its gross margins aregenerally lower than those of our other businesses (but with lower associatedSG&A expense).

 

***Selling, General and Administrative Expense. ***Ourselling, general and administrative expense increased $545 thousand or 9.8%, to$6.1 million during the second quarter of 2010 from $5.5 million during thesecond quarter of 2009.  Our SG&A asa percentage of revenue declined from 35.1% for the second quarter of 2009 to34.8% for the second quarter of 2010.  SG&Aexpense associated with our two new business initiatives were responsible for almostall of the increase in our SG&A expense during the second quarter of2010.  These new initiatives willcontribute to an increase in our SG&A expense in future periods, but weexpect the rate at which our total SG&A expense will grow will be lower thanthat of our consolidated revenue, resulting in lower SG&A expense as apercentage of revenue.

 

***Amortization of Intangibles.***  Amortization expense declined $150 thousandto $163 thousand for the second quarter of 2010 compared to $313 thousand forthe second quarter of 2009.  Our amortization expense has declined asintangible assets associated with acquisitions we have made over the past threeyears have become fully amortized. Absent any new acquisitions, none of which are currently planned,amortization expense is expected to be $147 thousand during and $117 during forthe third quarter and fourth quarters of 2010, respectively.

 

***Other Non-Operating (Expense) Income.***  Other expense declined $437thousand to income of $40 thousand for the second quarter of 2010 compared toexpense of $397 thousand for the second quarter of 

 

20

----

Table of Contents

 

2009. Interest expense was $8 thousand for the three-month period ended June 30,2010, a decrease of $419 thousand when compared to $427 thousand for the sameperiod during 2009.  The components ofinterest expense for the three-month periods ended June 30, 2010 and 2009are as follows:

 
| **Three months ended June 30,**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |
| Note payable                                               |       | $        | —     |     | $          | 26 |   |
| Mortgage                                                   |       | 5        |       | 4        |       |
| Subordinated convertible notes                             |       | —   |       | 125      |       |
| Other                                                      |       | 3        |       | 22       |       |
|                                                       |       |     |       |     |       |
| Total contractual interest                                 |       | $        | 8          |     | $          | 177 |   |
|                                                       |       |     |       |     |       |
| Amortization of deferred issuance costs and debt  discount |       | —   |       | 250      |       |
|                                                       |       |     |       |     |       |
| Total interest expense                                     |       | $        | 8          |     | $          | 427 |   |

 

Our contractual interest declined $169 thousand to$8 thousand for the three-month period ended June 30, 2010 from $177thousand for the same period during 2009. The decline was the result of the repayment of our notes payable andconversion of our subordinated notes during late 2009.  Our total interest expense declined anadditional $250 thousand as a result of the elimination of the amortizationexpense associated with the subordinated notes.

 

Interest income increased $18 thousand to $48thousand during the second quarter of 2010, from $30 thousand during the secondquarter of 2009.  Approximately $40thousand of the interest income recognized during the second quarter of 2010was amortization of the discount on our long-term receivables, compared to $21thousand recognized during second quarter of 2009.

 

***Discontinued Operations.***  During the three-month period ended June 30,2009 we reported a $637 thousand loss from discontinued operations related toour former Energy Technology business. We sold this business in August 2009, therefore there was no lossfrom discontinued operations during the 2010 period.

 

21

----

Table of Contents

 

**Six months Ended June 30, 2010 Compared to Six monthsEnded June 30, 2009**

 

***Consolidated Results***

 
| ** **                                | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                | ** ** | **June 30,**              | ** ** | **Change** | ** ** |
| ** **                                | ** ** | **2010**                       | ** ** | **2009**   | ** ** | **$** | ** ** | **%** | ** ** |
|                                      |       |                           |       |       |       |   |   |   |   |
| Revenue                                   |       | $                              | 29,321     |       | $          | 29,520 |   | $ | (199 | ) | -0.7 | % |
| Cost of sales                             |       | 23,273                         |       | 23,873     |       | (600 | ) | -2.5 | % |
| Gross profit                              |       | 6,048                          |       | 5,647      |       | 401 |   | 7.1 | % |
|                                      |       |                           |       |       |       |   |   |   |   |
| Selling, general and administrative       |       | 12,527                         |       | 10,782     |       | 1,745 |   | 16.2 | % |
| Amortization of intangibles               |       | 325                            |       | 658        |       | (333 | ) | -50.6 | % |
| Operating Loss                            |       | (6,804                         | )          | (5,793     | )          | (1,011 | ) | 17.5 | % |
|                                      |       |                           |       |       |       |   |   |   |   |
| Other income (expense)                    |       | 80                             |       | (840       | )          | 920 |   | -109.5 | % |
| Loss from continuing operations           |       | (6,724                         | )          | (6,633     | )          | (91 | ) | 1.4 | % |
|                                      |       |                           |       |       |       |   |   |   |   |
| Loss from discontinued operations         |       | —                         |       | (1,029     | )          | 1,029 |   | -100.0 | % |
| Net loss                                  |       | $                              | (6,724     | )          | $          | (7,662 | ) | $ | 938 |   | -12.2 | % |
|                                      |       |                           |       |       |       |   |   |   |   |
| Preferred stock dividends                 |       | —                         |       | (1,202     | )          | 1,202 |   | -100.0 | % |
| Net loss available to common stockholders |       | $                              | (6,724     | )          | $          | (8,864 | ) | $ | 2,140 |   | -24.1 | % |

 

The following table presents the percentage ofcertain items to revenue:

 
| ** **                                | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **June 30,**    | ** ** |
| ** **                                | ** ** | **2010**             | ** ** | **2009** | ** ** |
|                                      |       |                 |       |   |   |
| Revenue                                   |       | 100.0                | %          | 100.0 | % |
| Cost of sales                             |       | 79.4                 | %          | 80.9 | % |
| Gross profit                              |       | 20.6                 | %          | 19.1 | % |
|                                      |       |                 |       |   |   |
| Selling, general and administrative       |       | 42.7                 | %          | 36.5 | % |
| Amortization of intangibles               |       | 1.1                  | %          | 2.2 | % |
| Operating Loss                            |       | -23.2                | %          | -19.6 | % |
|                                      |       |                 |       |   |   |
| Other income (expense)                    |       | 0.3                  | %          | -2.8 | % |
| Loss from continuing operations           |       | -22.9                | %          | -22.5 | % |
|                                      |       |                 |       |   |   |
| Loss from discontinued operations         |       | 0.0                  | %          | -3.5 | % |
| Net loss                                  |       | -22.9                | %          | -26.0 | % |
|                                      |       |                 |       |   |   |
| Preferred stock dividends                 |       | 0.0                  | %          | -4.1 | % |
| Net loss available to common stockholders |       | -22.9                | %          | -30.0 | % |

 

22

----

Table of Contents

 

***Revenue.***  Our revenue for the six months ended June 30,2010 was $29.3 million, representing a 0.7%, or $199 thousand decline whencompared to the $29.5 million earned during the six months ended June 30,2009.  Revenue from sales to our C&Imarkets declined approximately $1.5 million when compared to the year earlierperiod, while revenue from our public sector markets was approximately $6.4million lower.  These revenue declineswere largely offset by approximately $6.2 million earned from our utilityprogram management division and $1.5 million earned under the FRR contract.  Neither the utility program managementdivision nor the FRR contract generated any revenue during the first six monthsof 2009.  C&I revenue for the firsthalf of 2009 benefited from several projects that carried over from a verystrong fourth quarter of 2008, whereas weaker revenue during the fourth quarterof 2009 resulted in fewer projects that carried over into the first half of2010, contributing to the decline in revenue when compared to the same periodduring 2009.  The decline in revenue inour public sector market during the first half of 2010 was primarily caused byuncertainty regarding financing sources for our public sector clients.  We believe that these issues have begun to beresolved and should not have as much impact on revenue in future periods.

 

***Gross Profit. ***Our gross profit for the six-month period ended June 30, 2010 was$6.0 million, a $401 thousand, or 7.1%, increase over the $5.6 million earnedduring the same period in 2009.  Theincrease in our gross profit was the result of higher gross margins earned onslightly lower revenue during the first six months of 2010.  Our gross profit margin was 20.6% for thesix-month period ended June 30, 2010, compared to 19.1% for the six monthsended June 30, 2009.  Contributingto the increase in the gross margin was a mix of business that included alarger portion of engineering services in our C&I market and contributionsfrom our new utility program management division which did not generate anyrevenue during the first half of 2009. We expect our gross margins for the balance of the year to be lower thanthe gross margin earned during the second quarter of 2010 as the mix of ourbusiness changes such that our lower margin public sector and direct governmentbusinesses are expected to represent a larger portion of our total revenue andour higher margin C&I and utility program management businesses areexpected to represent a smaller portion.

 

***Selling, General and Administrative Expense. ***Ourselling, general and administrative expense for the six-month period increased$1.7 million or 16.2%, to $12.5 million when compared to $10.8 million for thesame period during 2009.  The majority ofthis increase was related to our new utility program management and directgovernment divisions, both of which we initiated during the second half of2009.

 

***Amortization of Intangibles.***  Amortization expense declined $333 thousandto $325 thousand during the first half of 2010 from $658 thousand during thefirst half of 2009.  Amortization expensehas declined as intangible assets associated with acquisitions we made over thepast three years have become fully amortized.

 

***Other Non-Operating (Expense) Income.***  Other expense declined $920thousand to income of $80 thousand during the six-month period ended June 30,2010 when compared to $840 thousand of expense for the year earlierperiod.  Interest expense was $18thousand for the first half of 2010 compared to $903 thousand for the firsthalf of 2009.  The components of interestexpense for the six-month periods ended June 30, 2010 and 2009 are asfollows:

 

23

----

Table of Contents

 
| **Six months ended June 30,**                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |
| Lines of credit                                            |       | $        | —     |     | $          | 53 |   |
| Note payable                                               |       | —   |       | 53       |       |
| Mortgage                                                   |       | 10       |       | 8        |       |
| Subordinated convertible notes                             |       | —   |       | 248      |       |
| Other                                                      |       | 8        |       | 46       |       |
|                                                       |       |     |       |     |       |
| Total contractual interest                                 |       | $        | 18         |     | $          | 408 |   |
|                                                       |       |     |       |     |       |
| Amortization of deferred issuance costs and debt  discount |       | —   |       | 495      |       |
|                                                       |       |     |       |     |       |
| Total interest expense                                     |       | $        | 18         |     | $          | 903 |   |

 

Total contractual interest (the interest onoutstanding loan balances) decreased $390,000 to $18,000 during the first sixmonths of 2010 from $408,000 during the first six months of 2009.  The reduction in contractual interest was theresult of the repayment of our line of credit and notes payable and theconversion of our subordinated notes to common stock during the second half of2009.  Amortization expense of thedeferred issuance costs and debt discount was eliminated with the conversion ofthe subordinated notes resulting in a further reduction of our total interestexpense by $495,000 when compared to the year earlier period.

 

Interest income increased $35 thousand to $98thousand during the first six months of 2010, from $63 thousand during thefirst six months of 2009.  Approximately$81 thousand of the 2010 interest income was amortization of the discount onour long-term receivables, compared to $43 thousand during 2009.

 

***Discontinued Operations.***  During the first six months of 2009 wereported a $1.0 million loss from discontinued operations related to our formerEnergy Technology business.  We sold thisbusiness in August 2009, therefore there was no loss from discontinuedoperations during the 2010 period.

 

**Liquidity and Capital Resources**

 

Asof June 30, 2010, we had cash and cash equivalents (including restrictedcash) of $19.4 million, compared to $23.4 million on December 31, 2009.Our debt obligations as of June 30, 2010 consisted of a mortgage of $400thousand on our facility in Elk Grove Village Illinois and various vehicleloans totaling $190 thousand.

 

Ourprincipal cash requirements are for operating expenses, the funding ofinventory and accounts receivable, and capital expenditures. We have financedour operations since inception primarily through the sale of equity, as well asthrough various forms of secured debt.

 

24

----

Table of Contents

 

Thefollowing table summarizes, for the periods indicated, selected items in ourconsolidated statement of cash flows:

 
| **Six months ended June 30,**                    | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| Net cash used in operating activities                 |       | $        | (3,594     | )        | $          | (6,090 | ) |
| Net cash used in investing activities                 |       | (3,531   | )          | (805     | )          |
| Net cash (used in) provided by financing  activities  |       | (69      | )          | 7,834    |       |
|                                                  |       |     |       |     |       |
| Net (Decrease) Increase in Cash and Cash  Equivalents |       | $        | (7,194     | )        | $          | 939 |   |
|                                                  |       |     |       |     |       |
| Cash and Cash Equivalents, at beginning of period     |       | 22,870   |       | 3,734    |       |
|                                                  |       |     |       |     |       |
| Cash and Cash Equivalents, at end of period           |       | $        | 15,676     |     | $          | 4,673 |   |

 

**Six months Ended June 30, 2010 Compared to Six monthsEnded June 30, 2009**

 

Netunrestricted cash decreased $7.2 million during the first six months of 2010 ascompared to increasing $939 thousand during the same period in 2009.

 

*OperatingActivities*

 

Operatingactivities consumed cash of $3.6 million during the six-month period ended June 30,2010 as compared to consuming cash of $6.1 during the same period of 2009.

 

Whethercash is used or generated by operating activities is a function of theprofitability of our operations and changes in working capital.  To get a better understanding of cash sourcesand uses, our management separates the cash used or provided by operatingactivities into two categories: the cash consumed (or generated) by operatingactivities before changes in working capital; and the cash consumed (orgenerated) from changes in working capital.

 

Thecash consumed by operating activities before changes in working capital increased$100 thousand to $5.4 million during the first six months of 2010 as comparedto consuming $5.3 million during the first six months of 2009.  The increase in the cash consumed byoperating activities before changes in working capital was the result of thehigher cash operating loss (excluding depreciation, amortization and sharebased compensation) largely due to higher SG&A expense, offset by theelimination of the loss from discontinued operations.  We believe that we will see improvements inthe cash consumed by operating activities before changes in working capital ifour revenue and profitability improve as we believe they will, such that webelieve our operations will generate cash before changes in working capitalduring the second half of the year.

 

Changesin working capital generated cash of $1.8 million during the first half of2010, compared to consuming $793 thousand during the first half of 2009.  We expect our working capital requirements toincrease in future periods with increases in our sales, though we believe thatour new business initiatives 

 

25

----

Table of Contents

 

willhave lower working capital requirements than our existing businesses, whichwill help to will keep the growth in working capital to a rate that is lowerthan the growth of our future sales.

 

*InvestingActivities*

 

Weused $3.5 million in investing activities during the six-month period ended June 30,2010, compared to using $805 thousand during the six-month period ended June 30,2009.  During the 2010 period we pledged$3.3 million as collateral to support certain letters of credit which are usedto obtain surety bonds, which are often required for our governmentcontracts.  These letters of credit areexpected to decline to approximately $1 million by the end of 2010 and shouldbe terminated completely during 2011.  Asthe letters of credit are reduced or terminated our collateral will bereleased. We also made a net investment in property and equipment of $230thousand during the first half of 2010, compared to $191 thousand during thesame period of 2009.  Most of the 2010purchases were related to the opening of a new office to support our utility programmanagement initiative, for enhancements to our accounting system and for newconstruction equipment.  During the firsthalf of 2009 we paid $614 thousand for the AEM earn-out and costs associatedwith the acquisition of AEM.

 

*FinancingActivities*

 

Financingactivities consumed cash of $69 thousand during the six-month period ended June 30,2010 as compared to generating $7.8 million during the same period in2009.  During the first half of 2010 wemade principal payments of $141 thousand on our debt.  This was partially offset by $72 thousandreceived from the sale of shares of our common stock to our employees throughour Employee Stock Purchase Plan.  In March 2009we closed on the acquisition of Advanced Biotherapy, Inc. (“ADVB”) andgained access to its cash balances of $7.4 million.  We treated this acquisition as an offeringbecause we acquired ADVB for its cash, and we discontinued all its operationsupon the closing of the acquisition.  In January 2009we closed on tranche B of the November 2008 PIPE, generating cash proceedsof $3,275,000.  The proceeds from thesetwo transactions were partially offset by a $1,850,000 net pay down on our lineof credit; $796 thousand in transaction costs related primarily to theacquisition of ADVB; and $223 thousand in scheduled principal payments on ourdebt.

 

**SOURCESOF LIQUIDITY**

 

Ourprimary sources of liquidity are our available cash.

 

Ourability to continue to expand our sales will require the continued commitmentof significant funds. The actual timing and amount of our future fundingrequirements will depend on many factors, including the amount, timing andprofitability of future revenues, working capital requirements and the leveland amount of our sales and marketing efforts, among other things.

 

Wehave raised a significant amount of capital since our formation through theissuance of shares of our common and preferred stock and notes, which has allowedus to acquire companies and to continue to execute our business plan.  Most of these funds have been consumed byoperating activities, either to fund our losses or for working capitalrequirements.  In an attempt to move theCompany to a position where it can start to generate positive cash flow ourmanagement has set the following key strategies for cash flow improvementduring the second half of 2010 and beyond:

 

26

----

 

Table of Contents

 

·                  Focus on increasing thesales and profitability of our products and services while controlling thegrowth in our SG&A expense.  We believe that to a great degree our abilityto generate positive cash flow is dependent on our ability to increase saleswhile limiting the growth of our SG&A expense and controlling changes inour gross margins.  We believe that wehave built a corporate infrastructure over the past three years that is capableof supporting a large, diversified national company.  We believe that this infrastructure cansupport significantly higher revenue without a proportional increase in ourSG&A expense.  We are focused oncontinually reducing our SG&A expense as a percentage of revenue with atarget of reducing it to 14% or less within the next few years. We believe this is a sustainable SG&A expense ratiofor the business over the longer term and reflects our expectations withrespect to our ability to achieve additional operating leverage.  Toachieve this target SG&Aexpense ratio we will need to significantly increase ourrevenue.  If we are able to begin toachieve this goal, while holding or improving our gross margins, we believe wewill begin to generate positive cash flow and earnings within the next 12 to 24months.

 

·                  Aggressively manage ourcosts in order to conserve cash.  The prudent use of the capital resourcesavailable to us remains one of our top priorities.  We are constantly reviewing our operationslooking for more efficient ways to achieve our objectives.

 

Webelieve that if we are successful in increasing our revenue while controllingthe growth in our operating expenses we should have sufficient liquidity toallow us to operate until our operations turn cash flow positive.

 

**Cautionary Note Regarding Forward-Looking Statements**

 

Ourdisclosure and analysis in this report, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations contains “forward-looking”information within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, adopted pursuant to the Private Securities Litigation Reform Act of1995. Statements that are not purely historical may be forward-looking. You canidentify these forward-looking statements by the use of words such as “anticipate,”“believe,” “estimate,” “expect,” “hope,” “intend,” “may,” “project,” “plan,”  “goal,” “target,’ “should,” and similarexpressions, including when used in the negative.

 

Forward-lookingstatements are subject to various risks and uncertainties. Accordingly, thereare or will be important factors that could cause actual results to differmaterially from those indicated in these statements, including but not limitedto those described in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission under “Part II, Item 1A—RiskFactors” and the following:

 

·                  we have alimited operating history under our current business model in a rapidlyevolving market, which may make it difficult to evaluate our business andprospects, and may expose us to increased risks and uncertainties;

·                  we haveincurred significant operating losses since inception and may not achieve orsustain profitability in the future;

·                  the currenteconomic downturn could diminish the demand for our services and products;

·                  it is difficultfor us to estimate our future quarterly results;

·                  we operate in ahighly competitive industry and if we are unable to compete successfully ourrevenue; and profitability will be adversely affected; and

 

27

----

Table of Contents

 

·                  we may beunable to obtain sufficient bonding capacity to support certain serviceofferings.

 

Allforward-looking statements in this report should be considered in the contextof the risk and other factors described above and as detailed from time to timein the Company’s Securities and Exchange Commission filings. Anyforward-looking statements speak only as of the date the statement is made andwe undertake no obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise. It is notpossible to identify all of the risks, uncertainties and other factors that mayaffect future results. In light of these risks and uncertainties, theforward-looking events and circumstances discussed in this report may not occurand actual results could differ materially from those anticipated or implied inthe forward-looking statements. Accordingly, users of this report are cautionednot to place undue reliance on the forward-looking statements.

 

Exceptas otherwise required by federal securities laws, we do not undertake anyobligation to publicly update, review or revise any forward-looking statements,whether as a result of new information, future events, changed circumstances orany other reason.

 

ITEM 3.                                                  **Quantitative and Qualitative Disclosures About Market Risk**

 

Notapplicable.

 

ITEM 4.                                                  **Controls and Procedures**

 

**DisclosureControls and Procedures.**

 

Ourmanagement, including our chief executive officer and our chief financialofficer, maintains our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) and has evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on such evaluation, our chief executiveofficer and chief financial officer have concluded that, as of June 30,2010, such disclosure controls and procedures are effective for the purpose ofensuring that material information required to be in the reports that wesubmit, file, furnish or otherwise provide to the Securities and ExchangeCommission is accumulated and communicated to our management, including ourchief executive officer and chief financial officer, as appropriate to allowtimely decisions regarding required disclosure.

 

**Changesin Internal Controls.**

 

Therehave not been any changes in our internal control over financial reporting (asdefined in Rule 13a-15(f) under the Exchange Act) during the quarterended June 30, 2010 that have materially affected or are reasonably likelyto materially affect our internal control over financial reporting.

 

28

----

Table of Contents

 

**Limitationsof the Effectiveness of Internal Control**

 

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the internal controlsystem are met.  Because of the inherentlimitations of any internal control system, no evaluation of controls canprovide absolute assurance that all control issues, if any, within a companyhave been detected.

 

**PART II. OTHER INFORMATION**

 

ITEM2.                                                  **Unregistered Sales of Equity Securities and Use of Proceeds**

 

OnJune 3, 2010, we issued 18,359 shares of our common stock to five of ouroutside directors who participate on various Board committees.  These shares vest 50% on grant and 50% on thefirst anniversary of grant if the director is still serving on the Company’sboard of directors on the vesting date. Such shares were issued in consideration of the recipients’ service onthe Board committees on which they serve and were issued in transaction exemptfrom registration pursuant to section 4(2) of the Securities Act of 1933

 

ITEM 6.                                                  **Exhibits**

 
| 31.1   |   | Certificate  of Chief Executive Officer pursuant to Securities Exchange Act  Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                |
| 31.2   |   | Certificate  of Chief Financial Officer pursuant to Securities Exchange Act  Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                |
|   |   |                                                                                                                                                                                                                |
| 32.1   |   | Certification  of the Chief Executive Officer of the Corporation Pursuant to  Section 1350 of Chapter 63 of Title 18 of the United States Code  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                                                                                |
| 32.2   |   | Certification  of the Chief Financial Officer of the Corporation Pursuant to  Section 1350 of Chapter 63 of Title 18 of the United States Code  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

29

----

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                         | LIME  ENERGY CO.: |
|------------------------------|-------------------|
|                         |              |   |
|                         |              |   |
| Dated:  August 10, 2010 | By:               | /s/  David Asplund |
|                         |              | David  Asplund |
|                         |              | *Chief Executive Officer (principal* |
|                         |              | *executive officer)* |
|                         |              |   |
|                         |              |   |
| Dated:  August 10, 2010 | By:               | /s/  Jeffrey Mistarz |
|                         |              | Jeffrey Mistarz |
|                         |              | *Chief Financial Officer (principal* |
|                         |              | *financial and accounting officer)* |

 

30

----